Some members of final salary schemes, such as Liam Fearnley (pictured) are
desperate to cash in before the freedom is scrapped

Workers are rushing to exit “gold-plated” final salary pensions for fear of being permanently blocked from using the new pension freedoms to cash in their funds.

In March, the Government said a “revolutionary” ability to make unlimited withdrawals from pension savings in retirement would be reserved for savers with stock market-linked plans. The only way final salary members could use the freedoms would be to transfer to these plans.

However, the Government intends to ban savers from transferring final salary funds when the new rules take effect next April.

The prospect of missing out on a potential windfall has jolted savers into action. Pension advisers have experienced a sharp rise in inquiries about initiating transfers before the door is bolted in just 10 months’ time.

Deloitte, the accountancy firm, said one of the schemes it serviced had had the equivalent of a year’s normal transfers take place in a few weeks. Tony Clare, senior pensions partner at the firm, said: “A greater number seem to be considering transferring out 'while stocks last’.”

Pension consultants Punter Southall said a large number of administration departments had experienced a “big rise” in inquiries.

Many of those taking action are concerned about a permanent lock-in, according to Ben Roe of Aon Hewitt, another consultancy. “We believe this rise in activity is being driven by people who might always have considered taking a transfer but are worried this facility might be withdrawn,” he said.

The Government wants to block final salary transfers because it fears bond markets – and public finances – could be flattened next April if large numbers flooded out of final salary schemes, according to David Robertson of the Association of Consulting Actuaries. “We know that the Treasury received advice to this effect,” he said.

The Department for Work & Pensions is consulting on how members of both public and private-sector schemes should be treated after April 2015. The five million workers with a public-sector pension are almost certain to be locked in. This is because their pensions are mostly “unfunded”, which means no money has been set aside to pay their retirement income. If large numbers transferred out, the Government would not have enough money to cover these demands and would need to borrow.

Early indications suggest that significant numbers of private-sector employees will want to transfer out, particularly the two million people with small deferred benefits from previous employment. There are also signs that some employers will be enthusiastic to encourage this process as it would reduce their liabilities. Experts expect new transfer initiatives and incentives as a result.

Final salary pensions are considered extremely valuable because the payouts are “defined”. This means pensioners’ incomes are linked to wages and years in employment, rather than contributions and the vagaries of stock markets. That is why the income is seen as “gold-plated”, so show extreme caution and seek advice before transferring out.

However, calculations for Your Money by Hymans Robertson, the pension advisers, indicate that it can make sense for some members of private schemes to leave. It is less likely to be advantageous for those who work in the public sector, but occasionally makes sense (see below).

Chris Noon, a senior actuary at Hymans Robertson, said: “Anyone planning to exit a scheme before April must begin their homework now. Get all relevant figures together to be sure you are making the right decision. All schemes differ, so it comes down to understanding all the benefits which your pension will offer you or your survivors, and comparing that with the transfer value and how that might eventually be taxed.”

Liam Fearnley (pictured above) is one of those keen to transfer out. The 28-year-old consultant from Redhill in Surrey has a defined benefit pension from his first job worth less than £10,000 in cash terms, which he wants to transfer across to his current plan to give him greater flexibility.

He has asked for a quotation from the former employer but is concerned that its slow administration will scupper his plans. “It took over six months for them to action a simple change of address request,” he said. “I can’t bear the thought of all the extra admin I will have to engage in for the sake of such a small amount of money. I would much rather have the option later to withdraw the money as I please.”

Who could benefit

Final salary pensions guarantee a certain income which rises with inflation. They often include other benefits such as widows’ and survivors’ pensions, disability and death benefits. However, money today can in some cases be more valuable than these big promises for the future. This could be the case for those in poor health, the terminally ill, or anyone heavily in debt. Single people with no need for spouses’ benefits might gain from leaving private-sector schemes, as might those with small “deferred” pensions.

A man due £20,000 a year at age 65 might qualify for a transfer value of £400,000. If he stayed in the scheme, he would need to live to 85 to obtain full value (before inflation). If he died aged 75, he would be paid only £200,000.

In the public sector, single people in very poor health might benefit from transfers, Hymans Robertson found. But the generous survivor benefits made it less likely for those with a spouse.

Hymans examined local authority arrangements in detail to discover that an attractive feature was a guarantee that the pension would be paid for at least 10 years via a tax-free death grant should the member die early.

If someone earning £30,000, aged 55, and with 30 years in the scheme died shortly after retirement, the beneficiaries would receive £130,021 free of inheritance tax. This is on top of £90,590 taken as a tax-free lump sum. Combined, these payments give his dependants £220,611 tax-free. By contrast, nearly £200,000 of his transfer value of £265,810, would be taxable. On top, his spouse would receive £7,734 annually for the rest of her life, with further payments to any dependent children.

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